Selling Oklahoma

* Federal government considering using Fannie and Freddie to refinance loans in order to lower mortgage payments
* 30-year fixed rate mortgage average down to 4.12%, the lowest since Freddie Mac started tracking this in 1971. The 15-year fixed rate came in at 3.3% — also a record low (9/8 MarketWatch)
* Labor Dept. is investigating pay practices at many top home-building firms (9/8 WSJ)
* Federal Housing Finance Authority filed lawsuits against 17 of the biggest banks for selling $196B of risky loans to Fannie and Freddie (9/3 WSJ)

General
* Job growth ground to a halt (no change) and the employment to population ratio dropped to 58.2%. The unemployment rate in August remained at 9.1% (9/3 WSJ)
* Nearly 1 in 3 Americans who grew up middle class are now in a lower income rung (9/6 Washington Post)
* Euro-zone still a mess, with austerity measures in Greece and Italy being challenged
* 39% of households with heads aged 60-64 had primary mortgages in 2010, up from 22% in 1994 (9/7 WSJ)
As I write this blog a few hours before President Obama addresses the nation and tells us his plan this time to cure the nation’s economy, my concerns about our nation only grow. He will propose payroll tax cuts, jobs programs, extending unemployment, etc., and none of it will help more than a miniscule amount. If you doubt this, look at the results of previous government programs such as buying toxic assets from banks, various foreclosure-relief programs, financial regulation, home buyer tax credits, cash for clunkers, and on and on. None of them did much more than raise false hopes and dramatically increase the country’s debt.

Congress, both Republicans and Democrats, haven’t done any better. They, like the administration, want to be seen as doing something, regardless of the longer term costs. Those longer term costs – meaning the country’s huge debt – will prevent any meaningful economic recovery for years.

Meanwhile, unemployment stays high and the percentage of adult Americans who are working remains relatively low. Household debt as a percentage of after-tax income has decreased, though mortgage debt as a share of home values is quite high (9/8 WSJ). Companies are nervous about what is coming down the pipe, so they delay hiring or major investments as long as they can.

For real estate, this is all bad news. People without sufficient incomes or savings can’t buy properties. Even when they think they can, the banks get stingy about giving loans to all but their best-credit customers.

While there will be pockets of the country where values may climb – parts of Texas and North Dakota affiliated with energy discoveries and sections of the San Francisco Bay Area that are close to high-tech jobs spring to mind – vast swaths of the country will see price declines. San Diego, where I live, and several areas in the L.A. region still seem way overpriced to me and ready for another big drop.

Even areas that have historically been less volatile are going through tough times. For instance, I owned a mortgage note on a house in Oklahoma City, OK. The payer defaulted, so I had to foreclose and then spent a lot of money refurbishing the entire property. The house was transformed from being a dump into beautiful living quarters, albeit in a middle/low-income neighborhood. That house has been on the market for over three months with no offers and only a handful of interested people. I’ve even dropped the price two times and offered owner financing, to no avail. From discussions with other investors, it’s clear that my situation is fairly typical.

Does this mean that you should park your money in a savings account and forget about it for the next few years? Of course not. What it does mean is that you’ll need to be pickier about what you buy, possibly be creative with financing arrangements, and know your exit strategy. Don’t expect a recovering in housing to save you by jacking prices back up, so your fundamentals have to be sound.

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5 Comments

Alan, you pointed out a great selection of interesting metrica by which to view the economy. I very much like the household debt to income ratio as well as total employment numbers.

I do have one question which seems very rarely asked. My question concerns your statement…. “Those longer term costs – meaning the country’s huge debt – will prevent any meaningful economic recovery for years”

Why to you say that? What evidence do you have. It is a wierd question because it seems clear but in reality our personal debt and government debt are totally different. Please name me one time in history when the US just spending to economic prosperity( i.e. raised taxes or spent less). It doesn’t happen we always, every time grow our way out of a resession or depression. Look at greece they had massive austerity and their deficit went from $12.5 billion to 15.5 billion and at the same time their GDP growth projections went even lower!!
This is always my problem with Krugman, he said we needed to spend more but never talked about how to pay for it or how it works and he still doesn’t get it. He is sorta right but for the wrong reasons. Now the US can’t just spend as foolishly as they have in the past with several of the programs you mentioned as prime examples but prudent spending is mathmatically neccessary for us to move ahead.

Kyle,
Thank you for your reply. My statement about the country’s debt preventing a recovery in the short term is based upon my judgement that the government spending money that it doesn’t have causes long term problem that will affect consumers via higher taxes, reduced services, probably worse morale and confidence, etc. We seem to be following the path that Japan took and has experienced over the last 20 years. Our GDP will fall as the government is forced to pull back.

I never cared for Krugman’s ideas, as he is a Keynesian believer, which I think has been thoroughly disproven. Unfortunately, his academic credentials make a lot of people believe that he knows what he is talking about, including many politicians on the left.

Thanks Alan. I have been a conservative all my life but I have always looked for answers and love to challenge my way of thinking. As for the federal government spending money it doesn’t have I don’t believe that to be the case at least in a manner of speaking. The US government is the only entity that can create the US dollar. The value of the money is determined by the value of the economy. The government has many poor programs and waste but also many functions that add to the productive private economy. Much of our recent deficits are triggered stabilization programs that take effect in a recession or depression. I am positive that our economy would be in a much worse place if their were no unemployment insurance, for instance.

The dollar supply is growing all the time because it must. Money must come from somewhere in order for a new industry to grow. The dollars we spend must be spent into existance by the government in order for the economy to grow. Spending is a misunderstood word because government spending is also done through the banking system by the government crediting money a bank to purchase a reserve in order to loan to a business. A big problem with our banking and governmental monetary system is that it is tied to laws that governed under the gold standard so now we only issue new money and label it debt when it really doean’t have to be. Inflation is the only real concern for the most part. We look back to exiting the great depreesion, this came about not because of new deal programs but mainly because of the economic engine that was WW2. This was a growth driver but also fueled by government spending as our debt to GDP hit 140%. We were able to come back from that because that growth engine initiated by government spending enabled us to grow out of our deficit. The same type of event happened during the reagan years where great tax reform as well as less talked about on the right, massive federal government spending fueled economic growth and we grew out of our recession.

Lastly, the conservative in me always came from my personal views and use of money. I need to spend within my means because my money is limited, I can’t create anymore myself. I need to save because I might not be able to work or be productive someday through a variety of means. These things do not apply to the US government because their is no end and their productive capabilities should never be taken away by old age or disability.

I also look at my personal investing. (Jeff Brown has an execellent example) If I purchase a income property for a $100,000 and put down $20,000 on a 15 yr note. If over those 15 yrs I just break even and maintain the home and the property gains no value, I have increased my $20,000 to $100,000 for a 500% gain which is pretty great annually as well and now have a nice monthly income without a mortgage. This only works as long as I can successfully hold it the full 15 years. The government can do the same type of thing, again I preder spending to achieve energy independence, and as long as they can spend in the meantime to get us to that goal we have something great and as the only issuer of the dollar, their is nothing to stop them and the rewards are excellent.

Hey Alan — Welcome to the tiny group of real estate pros in San Diego who bravely speak truth about our local market. A surprising number are still holding their collective breath for prices to return to 2006! At Happy Hour if I bring up my take on future SD home values, it gets quiet quickly. This is usually followed by me saying, with great enthusiasm, “Hey! How ’bout those Chargers!”

Hi Jeff,
Yes, San Diego has a ways to go down. I have learned that when people ask me about real estate, most just want to hear happy-talk. So, unless I think that they really want my opinion, I change the subject.

Thanks for the great feedback. You and I are certainly on the same page.